Self interest versus 'moral sentiment' in economic policy

A review by Bowles in Science considers:

...a shortcoming in the conventional economic approach to policy design: It overlooks the possibility that economic incentives that appeal to self interest may diminish ethical or other reasons for complying with social norms and contributing to the common good. It cites one simple example of this happening:

In Haifa, at six day care centers, a fine was imposed on parents who were late picking up their children at the end of the day. Parents responded to the fine by doubling the fraction of time they arrived late. When after 12 weeks the fine was revoked, their enhanced tardiness persisted unabated. While other interpretations are possible, the counterproductive imposition of the fines illustrate a kind of negative synergy between economic incentives and moral behavior. The fine seems to have undermined the parents' sense of ethical obligation to avoid inconveniencing the teachers and led them to think of lateness as just another commodity they could purchase.

A clip from the Bowles' discussion:

Although standard in economics, reliance solely on self-interest in the design of policies has never won universal assent. Until recently, however, dissenting views, like Titmuss' celebrated claim that paying for blood donations degrades the willingness to contribute, were thought to lack either empirical support or a coherent account of why separability might fail. But a recent experiment suggests that Titmuss may have been right, at least for women. Other experiments surveyed in this review provide additional evidence that material interests and moral sentiments are not separable in the sense required by the conventional economic approach to policy-making.

Economists, psychologists, and others, in part stimulated by these new empirical data, are well on their way to constructing an economic psychology of the interplay of self-regarding and other-regarding motivation that may eventually enlighten mechanism design and public policy....Good policies and constitutions are those that support socially valued ends not only by harnessing selfish preferences to public ends but also by evoking, cultivating, and empowering public-spirited motives. The modest tax on plastic grocery bags enacted in Ireland in 2002 that resulted in a 94 per cent decline in their use appears to have had just this effect : Carrying a plastic bag joined wearing a fur coat in the gallery of antisocial anachronisms.